Oct 4, 2015

What you should look for in a Financial Advisor

Some financial advisors are wise, others are otherwise. And over the course of your investing career (which is lifelong) your investments will go through quite a few ups and downs which will make you wiser about your advisor(s). As Jean Racine- the famous French dramatist from the 17th century, once said- “There are no secrets that time does not reveal”.

However, the challenge is to spot a good advisor without having to go through the pain of delayed realization. How should one go about that?

There are two key aspects to the delivery of financial advice. One is “service” and the other is “knowledge”. If your advisor is able to service your requirements well then that is a good portion of the battle one. Service is also easier to judge and predict. It is the knowledge component that becomes tricky for the client to breakdown and judge. The attempt of this note is to break down the knowledge component for you to be better able to understand the ability of your advisor.

I’m realizing more and more that a good financial advisor is also a ‘wise financial advisor.’ Therefore, the knowledge aspect has more to do with ‘worldly wisdom’ than it has to do with strutting facts about markets and GDP data. Why is this so?

One of my senior colleagues has this wonderful way of connecting the vagaries of life with the markets.  He’s always able to break-down my challenges for me and relate it to the movements of security prices. Investments are after-all a human endeavour and therefore it must be expected that all the challenges that one faces in other human endeavours are equally true about the markets. The only way to approach life’s challenges is through the continuous application of time tested principles and values. What we simply call ‘wisdom’.

Patience is one of the key-pillars of financial advice. You should, as a rule, stay away from anyone promising results quickly. If good results happen in a short period then this is more to do with luck than any amount of skill. A good advisor should be able to admit to this. It takes time for the efforts of a good advisor to show.

A good advisor should also be willing to invest in you just as you are investing with him. Don’t construe this to mean that you should “slowly test the waters”. Quite often we find that clients are slow in investing with their advisor. Today’s economics demands a “certain viable” size for a mutually beneficial relationship. You must understand this. Also if you have a good financial advisor and you don’t back him early then you could suffer from what in financial terms we call “opportunity cost” and in layman terms we call “regret”.

When I say ‘invest in you’ I mean he should follow a process and take the time and efforts to understand your current situation and requirements completely before proceeding to advice on investments. He needs to present his findings, explain his plans and take the time to break it down for you. And, most importantly, he should be looking at a long-term relationship.

Another aspect of financial advice is discipline. He should be able to stick to his processes and evaluate the performance of his strategy in a timely manner. He should also stick to his long-term strategy no matter the ‘noise’ coming from the markets. He should also, and this is extremely important, get you disciplined. As in all other human endeavours discipline is the key to creating long-term wealth.

You should also evaluate the intelligence of your financial advisor. Throw him off-guard asking him random (but relevant please!) questions. Evaluate his responses. Try and judge how well he understands the “basics”. Also, extremely important, evaluate the strategy that he plans for your investments. You evaluate a strategy not based on past performance but on the flexibility of the portfolio if things were to go wrong and also on the underlying investment philosophy in terms of what opportunities is he trying to exploit with your investments. Remember that he has to always be thinking about the “long-term”. Also, see how he incorporates “tax-planning” in to your over-all investments.

And lastly you should evaluate his commitment to the cause of your wealth. Are his incentives aligned to your “long-term wealth creation” or is it otherwise? How much effort and time is he willing to put in to making sure that your wealth is preserved as well as increased? Is he constantly updating his skills?    

Good advisors are like good opportunities- a rare species. When you find a good advisor you should back him to the hilt and it will make all the difference in your wealth.   

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